Legislators and others who advocate for increased sales or “consumption” taxes to balance the Kansas budget are missing an important detail in their deliberations: A sales tax is a tax increase on business.
It could be more than the business income tax increases now being considered by the Legislature, depending on which plan you examine.
Consider this: The Council on State Taxation is the go-to research organization on business taxes in the states. COST says in fiscal year 2013, 45 percent of all state and local sales taxes in Kansas were paid by business on “business input purchases.” This doesn’t mean the sales tax collected by business from customers and sent to the state. It’s the sales tax that business pays on items it must purchase to run its operation.
Simply put, it’s not the sales tax you pay on a cup of coffee; it’s the sales tax the business pays when it buys the coffee cup and the coffee.
COST says Kansas business paid $1.6 billion in sales tax on business input purchases in fiscal year 2013.
How does that compare with other taxes?
Sales tax is 28 percent of all local and state taxes paid by Kansas business, according to COST – behind property tax, which is in first place at 42 percent. Back in 2012, before the elimination of income taxes on many business owners, COST said individual income taxes paid by Kansas business were only about 6 percent of the total.
So, sales tax is a pretty big burden on Kansas business. The Tax Foundation says the average state and local sales tax in Kansas is 8.20 percent. That means for every penny the state increases sales tax, business pays about $195 million.
Ironically, while the governor and many legislators wring their hands over not wanting to raise, for example, $23 million in business income taxes, they seem willing to increase the sales tax $68 million on business inputs, per the May 19 House Taxation Committee plan.
Of course, different businesses have different tax burdens. Who’s affected?
A 2011 study by Ernst and Young for the Arkansas Chamber of Commerce looked at the business tax burden in several states in the region. Two areas that stuck out like a sore thumb in Kansas were business services (19 percent effective tax rate) and research and development (13 percent effective tax rate). Sales taxes were a major part of the problem for these types of organizations.
In the case of business services, sales tax was higher than property tax. That burden will increase with a sales tax increase.
The Tax Foundation has previously noted Kansas has a “top 10 sales tax burden” on business. It’s one of the reasons it has consistently ranked Kansas low for business tax competitiveness.
Different kinds of businesses pay different mixes of taxes. Also, Kansas law exempts many kinds of businesses from sales tax on inputs while others pay the tax.
So much for the much ballyhooed mantra of “not picking winners and losers.”
Bernie Koch of Wichita is executive director of the Kansas Economic Progress Council.